Analyst: GE/Alstom deal strengthens Alstom’s competitive position

According to analyst Eshna Basu of The Motley Fool, “the General Electric-Alstom deal could create the world’s largest rail equipment maker.” Basu’s analysis follows GE’s multi-billion-dollar purchase of Alstom’s power business last month—a deal that includes Alstom’s acquisition of GE Transportation’s signaling and communications business.

“With this deal, GE has further cemented its foothold in the power and energy segment, and management expects significant synergy gains,” says Basu. “Where does this leave Alstom, though? For starters, it’s going to be several billions richer, and there are some big strategic advantages, too. The total deal value after GE revised the offer comes to $10 billion. . . . With this cash influx, Alstom can pay down portion of its debt and increase shareholder returns. . . . This leaves room for Alstom to strengthen its competitive position against peers such as Ansaldo, Siemens, and Bombardier through acquisitions and organic growth.”

“In the post-takeover scenario, Alstom plans to hold on to its high-speed train manufacturing business and buy GE’s signaling business for $809 million,” notes Basu. “This would boost Alstom’s signaling sales by 40% and enable the French conglomerate to surpass Siemens to become the second-largest rail equipment maker in the world. Presently, Bombardier is the world’s top rail equipment maker by sales, followed closely by Siemens, while Alstom holds third place. Aside from its power joint ventures, Alstom will surface as a pure transportation company and an integrated manufacturer of rolling stock, signaling, and controls systems for mass transit systems. According to Bloomberg analysts, this could give the company governance advantages over Bombardier and Siemens. Alstom also gets to form ‘Global Rail Alliance’ with GE, where among other benefits it will get commercial support from GE in the U.S. and other geographies, assemble GE’s diesel locomotives in selected geographies, and service GE’s locomotives outside the U.S.”

According to Basu, “Ansaldo’s management believes that the rail equipment industry is ready to take up another consolidation cycle and will gradually evolve. The future of the industry lies in providing turnkey rail transit solutions, and companies will have to evolve into fully integrated organizations to accommodate this in the days to come. This will actually be a big change for present-day rail equipment makers that specialize in either signaling or rolling stock. In such a situation, Alstom’s management will have the freedom to chase further consolidation options. In addition to making Alstom a tougher competitor, the deal will also help the French train maker to better position itself for the changing market situation. Ansaldo has predicted that in the period between 2012 and 2015, most of the demand for rail signaling will come from emerging markets. These markets could see a CAGR (compound annual growth rate) of 4%-6% compared with the global market, which is expected to grow at 1%-3%.”

“The deal between Alstom and GE seems to be beneficial to both,” Basu concludes. “In addition to providing combination synergies to the American conglomerate, it is also facilitating Alstom’s growth. Alstom CEO Patrick Kron believes the arrangement to be a three-fold win: ‘It provides a future for the activities and employees of Alstom, it has an industrial logic that GE and ourselves called for, and it addresses the [French] government’s concerns regarding [France’s] energy transition and nuclear sovereignty.’ To sum it up, the deal has the potential to bring out the best in Alstom.”